Regions Bank v. Thomas

Appeal
by Permission from the Court of Appeals Circuit Court for
Shelby County No. CT00511307 Robert L. Childers, Judge

We
granted this appeal to determine whether the Court of Appeals
correctly applied the statutory "rebuttable presumption
rule" under Article 9 of the Uniform Commercial Code, as
codified at Tennessee Code Annotated section 47-9-626, in
reversing the trial court and concluding that the Plaintiff,
Regions Bank, was not entitled to recover a deficiency from
the Defendants, Thomas D. Thomas, Helen L. Thomas, and The
Thomas Family Living Trust. We conclude that both the trial
court and the Court of Appeals erred in their respective
applications of the "rebuttable presumption rule."
Accordingly, the judgment of the Court of Appeals is
reversed, the judgment of the trial court is vacated, and
this matter is remanded to the trial court for further
proceedings as set forth herein.

This is
the second appeal in this case, which arises out of a secured
transaction between LGT Aviation, Inc. ("Debtor"),
and the predecessor to the Plaintiff, Regions Bank
("Regions"). The pertinent facts are adequately set
out in the two prior opinions of the Court of Appeals and are
only briefly restated here. See Regions Bank v.
Thomas, 422 S.W.3d 550 (Tenn. Ct. App. 2013), perm.
app. denied (Tenn. Sept. 11, 2013) ("Regions
I"); Regions Bank v. Thomas, No.
W2015-00798-COA-R3-CV, 2016 WL 1719325, at *1 (Tenn. Ct. App.
Apr. 27, 2016), perm. app. granted (Tenn. Oct. 21,
2016) ("Regions II").

Debtor
borrowed in excess of $2, 300, 000 from Regions'
predecessor for the purchase of a 1981 Hawker 700-A aircraft
("Aircraft"), which secured the loan. Defendants
Thomas D. Thomas, Helen L. Thomas, and The Thomas Family
Living Trust (collectively, "Guarantors") jointly
and severally guaranteed the loan. Following Debtor's
default by failure to maintain insurance on the Aircraft,
Regions accelerated Debtor's payment obligations. Debtor
did not repay the accelerated loan, and in October 2007,
Regions filed suit against Guarantors, seeking recovery of
the outstanding loan balance, interest, costs, and
attorney's fees. While suit was pending, Regions
repossessed the Aircraft, expended funds to render it
flightworthy, and then expended additional funds to render it
marketable. Regions ultimately sold the Aircraft at a private
sale on December 2, 2008, for $875, 000. Debtor continued to
timely make all payments due on the loan until the Aircraft
was sold.

The
trial court held a hearing over several days in May 2011,
after which it entered judgment in favor of Regions. The
trial court found that Debtor had breached the loan agreement
and that the breach constituted a default, that Regions had
disposed of the Aircraft in a commercially reasonable manner,
and that Regions was entitled to recover a judgment for a
deficiency in the amount of $1, 642, 771.91, plus
pre-judgment interest in the amount of $945.15 per day for
859 days. Guarantors appealed.

The
Court of Appeals affirmed in part and reversed in part.
Regions I, 422 S.W.3d at 567. The Court of Appeals
affirmed the trial court's conclusion that Debtor had
breached the loan agreement and had defaulted by failing to
maintain insurance on the Aircraft, that Regions had not
waived the breach and default, and that Regions had not acted
in bad faith. Id. The Court of Appeals, however,
reversed the trial court's finding that Regions had
sufficiently complied with the notice requirements of
Tennessee Code Annotated sections 47-9-611 and -613, and
concluded that Regions' sale of the Aircraft had not been
commercially reasonable on this basis. Id. The court
vacated the trial court's deficiency judgment and
remanded the case to the trial court for further proceedings,
including discovery, on the amount of the deficiency, if any,
to which Regions was entitled under Tennessee Code Annotated
section 47-9-626. Id. at 566-67. The court deemed
all remaining issues pretermitted. Id. at 567.

On
remand, no additional discovery was conducted and the trial
court indicated that it would decide the case based upon the
evidence previously introduced at trial, together with any
additional evidence and deposition testimony already obtained
but that the parties now wished to introduce. The parties
were permitted to and did file proposed findings of fact and
conclusions of law. On March 27, 2015, the trial court
entered its "Findings of Fact, Conclusions of Law, and
Judgment."[1] The trial court concluded that Regions had
met its burden to rebut the presumption under Tennessee Code
Annotated section 47-9-626 and that Regions was entitled to
recover a deficiency in the total amount of $1, 210, 511.51.
Regions II, 2016 WL 1719325, at *4. Guarantors again
appealed.

The
Court of Appeals reversed. Id. at *1, *11. The Court
of Appeals determined that, in order to rebut the presumption
under Tennessee Code Annotated section 47-9-626, the burden
was on Regions to prove that Guarantors could not have
redeemed or purchased the collateral for an amount equal to
the sum of the secured obligation, expenses, and
attorney's fees had proper notice been provided.
Id. at *10. The court further determined that
Regions had failed to introduce any evidence to meet its
burden of proof in this regard. Id. at *11.
Accordingly, the Court of Appeals concluded that Regions had
not rebutted the statutory presumption by presenting evidence
that the sale of the Aircraft still would have yielded
proceeds less than the sum of the secured obligation,
expenses, and attorney's fees had proper notice been
provided to Guarantors. Id. Therefore, Regions was
not entitled to a deficiency. Id. The Court of
Appeals further concluded that Guarantors lacked standing to
seek any surplus pursuant to Tennessee Code Annotated section
47-9-625. Id. at *6-7.

Regions
filed an application for permission to appeal pursuant to
Rule 11 of the Tennessee Rules of Appellate Procedure. We
granted the application.

II.
Analysis

A.
Standard of Review

This
case involves the interpretation of a statute, which is a
question of law subject to de novo review with no presumption
of correctness. See Hardy v. Tournament Players Club at
Southwind, 513 S.W.3d 427, 433 (Tenn. 2017). More
particularly, it involves the application of a statutory
presumption, which is a question of law, which we review de
novo with no presumption of correctness. See Borner v.
Autrey, 284 S.W.3d 216, 219 (Tenn. 2009). We review the
trial court's findings of fact following a bench trial de
novo upon the record with a presumption of correctness,
"unless the preponderance of the evidence is
otherwise." Tenn. R. App. P. 13(d); Cross v. City of
Memphis, 20 S.W.3d 642, 644-45 (Tenn. 2000). We review
issues related to the admission or exclusion of evidence at
trial, including the admission or exclusion of expert
testimony, for an abuse of discretion. See Otis v.
Cambridge Mut. Fire Ins. Co., 850 S.W.2d 439, 442 (Tenn.
1992), on reh'g (Mar. 29, 1993).

B.
The Rebuttable Presumption Rule

This
case involves a secured transaction governed by Article 9 of
the Uniform Commercial Code ("UCC"), as adopted in
Tennessee in its revised form effective July 1, 2001. Tenn.
Code Ann. §§ 47-9-101 to -709; 2000 Tenn. Pub. Acts
2402-540. This Court previously has explained the scope of
UCC Article 9:

Article 9 provides a comprehensive statutory framework
governing the secured transaction process, from how a
creditor perfects its security interest to how it forecloses
on that interest. After default, a secured party may take
possession of the collateral and may sell or otherwise
dispose of it. Tenn. Code Ann. § 47-9-610(a) (2001). In
so doing, "[e]very aspect of [the] disposition of
collateral, including the method, manner, time, place, and
other terms, must be commercially reasonable." Tenn.
Code Ann. § 47-9-610(b) (2001).

At this
stage of the proceedings, it has been conclusively determined
that Regions failed to comply with the notice requirements of
Tennessee Code Annotated section 47-9-611 in its disposition
of the Aircraft. See Regions I, 422 S.W.3d at 567.
This triggered the "rebuttable presumption rule, "
as codified at Tennessee Code Annotated section 47-9-626. As
codified, the rebuttable presumption rule provides:

In an action arising from a transaction in which the amount
of a deficiency or surplus is in issue, the following rules
apply:

(1)A secured party need not prove compliance with the
provisions of this part relating to collection, enforcement,
disposition, or acceptance unless the debtor or a secondary
obligor places the secured party's compliance in issue.

(2)If the secured party's compliance is placed in issue,
the secured party has the burden of establishing that the
collection, enforcement, disposition, or acceptance was
conducted in accordance with this part.

(3)Except as otherwise provided in § 47-9-628, if a
secured party fails to prove that the collection,
enforcement, disposition, or acceptance was conducted in
accordance with this part relating to collection,
enforcement, disposition, or acceptance, the liability of a
debtor or a secondary obligor for a deficiency is limited to
an amount by which the sum of the secured obligation,
expenses, and attorney's fees exceeds the greater
of:

(A) the proceeds of the collection, enforcement,
disposition, or acceptance; or

(B) the amount of proceeds that would have been realized
had the noncomplying secured party proceeded in accordance
with this part relating to collection, enforcement,
disposition, or acceptance.

(4)For purposes of paragraph (3)(B), the amount of
proceeds that would have been realized is equal to the sum of
the secured obligation, expenses, and attorney's fees
unless the secured party proves that the amount is less than
that sum.

(5)If a deficiency or surplus is calculated under §
47-9-615(f), the debtor or obligor has the burden of
establishing that the amount of proceeds of the disposition
is significantly below the range of prices that a complying
disposition to a person other than the secured party, a
person related to the secured party, or a secondary obligor
would have brought.

Tenn. Code Ann. § 47-9-626 (emphasis added). As
explained in the relevant comment to this statute:

[Section 47-9-626] establishes the rebuttable presumption
rule for transactions other than consumer transactions. Under
paragraph (1), the secured party need not prove compliance
with the relevant provisions of this Part as part of its
prima facie case. If, however, the debtor or a secondary
obligor raises the issue (in accordance with the forum's
rules of pleading and practice), then the secured party bears
the burden of proving that the collection, enforcement,
disposition, or acceptance complied. In the event the secured
party is unable to meet this burden, then paragraph (3)
explains how to calculate the deficiency. Under this
rebuttable presumption rule, the debtor or obligor is to be
credited with the greater of the actual proceeds of the
disposition or the proceeds that would have been realized had
the secured party complied with the relevant provisions. If a
deficiency remains, then the secured party is entitled to
recover it. The references to "the secured obligation,
expenses, and attorney's fees" in paragraphs (3) and
(4) embrace the application rules in Sections 9-608(a) and
9-615(a).

One
leading treatise has explained the operation of the
rebuttable presumption rule as follows:

On a first reading of section 9-626, one may have trouble
finding the rebuttable presumption rule; it is buried in
9-626(a)(4). The drafters' plan for the application of
9-626 seems to be as follows. Under subsection (a)(1), the
secured party does not need to prove compliance with Part 6
unless its compliance is "placed in issue."
Presumably, one needs only to prove the amount received on
the sale of the collateral and the amount the debtor owes.
The difference between these numbers equals the
"deficiency." If the secured party's
compliance is put in issue, the creditor then has the
burden of showing that the "collection, enforcement,
disposition, or acceptance was conducted in accordance with
this part." If the secured creditor fails to prove its
compliance with Part 6, it suffers the consequence stated
in 9-626(a)(4), namely, a presumption that "the amount
of proceeds that would have been realized [if the secured
creditor had complied] is equal to the sum of the secured
obligation, expenses, and attorney's fees . . . ."
Of course, if the amount that would have been realized
equals the amount owed, there is no deficiency.

How does the secured creditor rebut the presumption
arising from the rule by that name? The last clause in
subsection 9-626(a)(4) ("unless the secured party proves
that the amount received on compliance would be less than
that sum") offers redemption to the misbehaving secured
creditor. If it proves that a complying sale or other
disposition would have brought an amount less than the amount
due from the debtor, the secured creditor rebuts the
presumption and earns a right to a deficiency judgment
measured by the amount that would have been recovered in a
complying disposition as the subtrahend in the formula
(Owed-Would Have Brought). To understand all this,
consider an example. Assume the debtor's total obligation
(including costs of sale, etc.) to the creditor is $100, 000.

Assume also that the foreclosure sale produces $10, 000 and
the debtor attacks creditor's notice or conduct of the
sale. If the creditor proves it complied with Part 6 of
Article 9, it recovers the full $90, 000. If the creditor
fails to prove it complied, and does not prove what a
complying foreclosure sale would have brought, the amount
produced by a complying sale is presumed to be $100, 000 and
the creditor recovers nothing. If the creditor is found to
have violated Part 6, but proves, for example, that a
complying sale would have produced only $15, 000, it recovers
the difference between its debt and $15, 000, or $85, 000.

Thus,
pursuant to the rebuttable presumption rule, in order to
recover a deficiency judgment, Regions was required to rebut
the statutory presumption and to prove that, had it given
Guarantors the required notice of the sale of the Aircraft,
the proceeds from the sale still would have been an amount
less than the sum of the secured obligation, expenses, and
attorney's fees. Tenn. Code Ann. § 47-9-626(4).

Messrs.
White, Summers, and Hillman suggest that "the drafters
[of the UCC] have done an admirable job making the law clear
and, at least in business transactions, uniform, " and
that "[s]ection 9-626 provides a clear roadmap for
judges and lawyers." White, Summers & Hillman,
supra, § 34:41 (footnotes omitted). This case
suggests, however, that the roadmap contains a significant,
unmarked turn. This case raises the question of the proper
operation of the rebuttable presumption rule and, more
particularly, the proof relevant to, and required or
sufficient to, rebut the statutory presumption and permit the
recovery of a deficiency under Tennessee Code Annotated
section 47-9-626(3) and (4). This question does not appear to
have been definitively answered by the drafters of the UCC,
by the commentators, or by the courts in this or other
states. Moreover, the trial court and the Court of Appeals
reached differing conclusions in this case. We endeavor here
to answer this question.

During
the trial before the first appeal and remand, the parties
introduced evidence relevant to the rebuttable presumption
rule. Regions, however, succeeded in precluding Guarantors
from introducing evidence regarding what they could and would
have done had they received notice of the sale and,
particularly, evidence regarding their ability and motivation
to redeem or purchase the collateral for an amount equal to
the sum of the secured obligation, expenses, and
attorney's fees. Guarantors made no offer of proof for
the record, and Regions did not introduce any countervailing
evidence. Because the trial court determined that Regions
complied with the notice requirements under Tennessee Code
Annotated section 47-9-611 and determined that the sale of
the Aircraft was otherwise commercially reasonable under
Tennessee Code Annotated sections 47-9-610 and 47-9-627, the
trial court made no findings regarding the rebuttable
presumption rule under ...

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